Getting to the Bottom of Prepaid Funeral Contracts

You’ve seen the commercials touting the advantages of pre-paying your funeral expenses. Most experts, however, consider prepaid funeral plans to be a financial mistake. It can be tempting to alleviate financial stress from your family during this difficult time, but there are better options.

Keep in mind there are two basic plans:

  • Guaranteed plans provide goods and services at today’s prices. However, some items are often exempt from guaranteed plans, such as flowers.
  • Non-guaranteed plans are applied toward goods and services at the prevailing costs when you die.

These plans are heavily regulated in many states. Know your state laws surrounding prepaid funeral contracts.

Prepaid funeral plans do have some advantages:

  1. You can plan your own funeral. Do you have a vision for your funeral? Prepaid plans can make it a reality. But remember that you can pre-plan your funeral without spending a dime. Funeral homes are happy to sit down with you and plan out every detail for the future. They’ll certain try to sell you on a prepaid plan, but you don’t have to say yes.

  2. Money is available to cover your final expenses. It’s one less thing your family has to worry about at the time of your death.

  3. Peace of mind. You’ll know that at least some of the financial and emotional burden has been removed.

While there are a few advantages to prepaid funeral plans, there are also several disadvantages.

The pitfalls of prepaid funeral plans:

  1. Refunds can be difficult to obtain. Be sure to inquire if you get all of your money back in case you change your mind. Some providers will give back part of your money, while others won’t give any refund. Penalties are the norm. Many states require a trust be established to hold the funds. The fees used to establish the trust aren’t refunded.
    • A 10% penalty and loss of 50% of the earnings isn’t unusual.

  2. Determine what happens if you move. Many plans are portable, but many are not. Know the details.

  3. You might not be fully covered. Most plans place the funds in a trust, and you’re covered for today’s costs. Hopefully, the funds will earn enough to outpace inflation. But it’s possible to still leave your family with a sizeable bill. If there is excess money left over, you can determine who will receive it.

  4. Consider that the provider could go bankrupt. If that happens, you might find yourself without a plan and suffer a loss of several thousand dollars. Embezzlement has been known to occur, too.

There is a better alternative: Life insurance.The average funeral expense is roughly $6,000. Contact your insurance professional and inquire about a policy to cover your funeral expenses.

Your current life insurance might be sufficient. But keep in mind that term insurance is a better choice for most general life insurance needs. Term insurance isn’t always acceptable for funeral purposes. You’re likely to need the funds to cover your burial after your term insurance runs out. Speak with an insurance professional and find the optimal solution.

Term insurance might be an option for the near future, and a whole life policy could be added later. There are specific insurance plans marketed for final expenses, but these are usually just whole life policies with a different name.

It’s an unpleasant topic, but it’s important to consider your final expenses and the effect they will have on those you leave behind. A prepaid funeral plan usually isn’t the best option. Consider using a life insurance policy instead.

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